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Options Trading: Sell the Meat and Buy the Wings


I heard about a saying in the options world 'sell the meat, buy the
wings', which I believe to be short CTM options and long 1 1/2 as many options that are many strikes further away but in same expiration

I ran different positions on the risk graph to reflect what it
might look like and found the Greeks to be similar to that of an Iron condor, but
with a better pay off and possibility of performing well in a big move

Would you be so kind as to respond in a blog post or a reply as to the
pitfalls of this positions and how best to manage?



Hello Joe,

Your interpretation of 'sell the meat; buy the wings' is not the one commonly used.  It's a flexible term and describes any butterfly, iron condor or credit spread.

The options bought may be several strikes removed, and you certainly may buy extras, but neither is necessary.

Any option whose strike price is farther OTM, even when it's the next nearest strike, is sufficient.

Joe, there is one portion of your comment/question that is crucial to this discussion, and I want to be certain that you understand the situation.

Any time you own extra options, the 'payoff' is going to look better on the risk graphs. Thus, be certain you get all the relevant information from those graphs. Sure the payoff is better today and tomorrow.  Joe: Have you considered how this position looks as time passes?  

Let's look at a position that fits your description.  For simplicity, let's examine just one side of the iron condor, or a simple credit spread.


INDX is trading @860; Expiration is 7 weeks from today.

Sell 10 INDX 890 calls


Buy 10 INDX 900 calls (figure 1, BLUE)

vs. Buy 15 INDX 940 calls (figure 1, RED)



figure 1

The thin lines show the profit and loss picture as of today, and the solid lines represent the value of the position when expiration arrives.  It is true that the back spread does better than selling the call spread if there is an immediate rally to 980.  But have you considered how this trade looks as time passes?

Here's the graph, just three weeks later.


figure 2

That thin red line's not looking so good anymore.  Again, this is a personal view, and from my perspective I would never open this type of trade.  A rally hurts, the passage of even a small amount of time hurts, an IV decrease hurts – and that's extremely likely if you get the desired rally.

Joe, I suppose you could say that the red line shows a 'better' risk graph becasue there's the chance for a big profit if the index moves higher by 200 points (23%) or more – in the next seven weeks.

But, from my perspective, this risk graph is far worse and the trade is far more risky.  The solid line represents the profit/loss at expiration.  The potential loss of $50k would talk me out of this trade.  Let me ask: What is it that you like about this?  Or did I pick a poor example?

To most of the options world, 'sell the meat and buy the wings' means to sell the more expensive options and buy the less expensive options.  Yes, you can buy extra options, but there is no need to make them so far OTM.


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